Sausalito hillside with homes

Equity Sharing

Equity sharing is a home ownership arrangement between two or more parties where the parties all have an ownership interest (hence the term "equity sharing"). Typically, one or more investors make some or all the downpayment on a home, and an occupier lives in the home and pays the monthly expenses. This benefits both parties because the investor has an investment with substantial growth potential that is secured by real estate, and the occupier can purchase a home that he/she would not otherwise be able to afford in this age of increasingly expensive real estate because he/she lacks the necessary downpayment. Both parties share in the property's appreciation. Furthermore, if done properly, the equity sharing arrangement can provide significant tax benefits to both parties.

Brian Collins has been quoted in the Wall Street Journal and San Diego Union-Tribune in article about equity sharing.

The Arrangement

Buyer-Investor ("Investor") supplies some or all the downpayment for a personal residence.

Buyer-Occupier ("Occupier") lives in the house and is responsible for the recurring expenses (just like a regular homeowner), such as property taxes, mortgage payments, etc.

Both parties must have an actual ownership interest in the property, either as tenants in common, joint tenants, or some other form of title, or through an entity that takes title, such as an LLC, partnership, living trust, etc.

The parties have fixed ownership percentages, which they can either agree upon or I can determine through a formula.

The agreement has a pre-determined term, usually about 5 years. This usually gives the property enough time to appreciate, while keeping the term short enough to free up funds to the Investor for other uses.

Under IRC Section 280A, the Investor must charge the Occupier fair rent for the right to use the Investor's portion of the property. I help the parties determine what is fair rent through market analysis and formulas. Under the parties' agreement, the Investor is then required to use this rental income to pay for homeowner's dues, property insurance (both of which would be tax-deductible to the Investor but not the Occupier), property taxes, and mortgage payments, but only up to the amount of rent received. Thus, after making the initial downpayment, there is no net cash outlay for the Investor. There is no additional cash outlay for the Occupier because the rent he/she pays is used to pay expenses the Occupier would otherwise have had to pay.

If the house has not appreciated sufficiently by the end of the term, the term could be extended either by agreement or automatically by terms of the contract.

At the end of the term, the Occupier has the first option to buy out the Investor based on an appraised value. If the option is not exercised, the Investor can buy out the Occupier. If neither party buys out the other, the property is sold.

If one party buys out the other, the buyer reimburses the seller for all principal payments contributed to the property plus the seller's equity in the property. If the property is sold, the Investor and Occupier are reimbursed for all principal payments contributed, and they split the remaining equity in proportion to their ownership percentages.

If one party breaches the agreement (which I define to include death, bankruptcy, or creditor liens), the other party has the power to foreclose on the property.

Tax Issues

Investor reports the rental income, and the related expenses paid with that rental income, for a zero net tax impact.

If the Investor is an active participant under the IRS's passive activity rules, the Investor can also deduct depreciation on the property, which would result in a net tax loss.

Occupier can deduct the tax-deductible payments he/she makes, such as mortgage interest and property taxes, whereas if he/she were renting there would be a big cash outlay every month with no tax deductions. Note that the Occupier cannot deduct the amounts paid from the Investor's rent, which means the Occupier loses 10-15% of the deductions he/she would have had if he/she owned the house outright. This is a small price to pay for the tax and appreciation benefits the Occupier receives through equity sharing.

The Investor can defer taxes on any gain on sale through a Section 1031 Exchange.

The Occupier can avoid taxes on the first $250,000 (if single) or $500,000 (if married) of gain on sale if he/she lives in the house for at least two years.


Allows the Occupier to own a personal residence where he/she otherwise would not be able to buy because he/she lacks downpayment funds (especially in expensive real estate markets like California where there are numerous well-paid people with excellent credit who want to buy a home but do not have the necessary cash for a downpayment).

The Occupier can start building a credit history.

Investor's investment is secured by real estate.

In contrast to the typical tenant, the Occupier has a vested interest in the property and thus typically will not vacate the property, damage the property, or fail to make payments.

Some banks do not require the Investor to be on the loan.

If the property were to appreciate, the parties' leveraged investments would provide potentially substantial capital gains.

Investor can diversify his/her portfolio with real estate.

Substantial tax benefits for both parties (see Tax Issues section above).

Low risk for both parties, especially if property is chosen wisely.

Rare transaction where both parties benefit.


This is a complex transaction that should be handled by an attorney.

Investors are often parents and Occupier is often a child that wants to buy his/her first house. This scenario also could present estate-planning benefits through annual gifting of the parents' investment in the property.

Because of equity sharing's growing popularity, Investors and Occupiers are increasingly unrelated parties who find each other through advertising, real estate agents, attorneys and CPAs, investment clubs, etc.

If the Investor and Occupier are not familiar with each other, I recommend that they try to get to know each other well enough to satisfy themselves they can co-exist for several years in this arrangement, and that the Investor require an Occupier with an excellent credit history.

Instead of a seller-financed second mortgage, a seller could advertise that he/she is open to an equity share agreement, which could make the property available to buyers who might otherwise not be able to afford that property.


Investor and Occupier buy a $500,000 house.

Investor contributes the 20% downpayment, or $100,000.

The parties agree to each own 50% of the property, and each take title as 50% tenants in common.

The parties agree to a 5-year term.

The Occupier pays $800 rent to the Investor each month (calculated using a proprietary software formula).

The Investor must use that rental income, until exhausted, to pay the property's expenses in the following order: (1) homeowner dues, which would be tax-deductible to the Investor but not the Occupier; (2) property insurance, which is also tax-deductible to the Investor but not the Occupier; (3) property taxes, which the parties deduct as they each pay; and (4) mortgage payments, the interest portion of which the parties deduct as they each pay.

The Occupier pays whatever remains unpaid of the $2,400 monthly mortgage payment, property taxes, property insurance, and homeowner's dues. The Occupier may deduct all such mortgage interest and property tax payments made over the 5-year term.

The Investor may be able to deduct depreciation on his/her half of the property.

Assuming just 6% annual appreciation, the property would be worth over $669,000 at the end of the 5-year term.

If the property were sold at the end of the term for $669,000, and if the loan balance were $372,000, there would be $297,000 of equity in the property.

Out of the equity, the first distributions would be to the Investor for his/her $100,000 downpayment and to the Occupier for his/her $28,000 loan principal payments made over the 5 years.

$169,000 of equity would remain (before commissions and costs), which the parties would split equally because they each had a 50% ownership interest in the property.

In five years the Investor would make $84,500 (half of $169,000 before commissions and costs) on a low-risk $100,000 investment, and he/she could defer income taxes on that gain by rolling the gain over through a Section 1031 Exchange.

Instead of paying rent for five years with nothing to show for it, the Occupier would also make $84,500 (before commissions and costs), and the Occupier would have deducted $116,000 in mortgage interest plus some property taxes. The Occupier would not pay taxes on that gain.